Trick To Make a Flexible, Customized Mortgage

Detail from Asutushallituksen tyyppi "Er.As.tyyppi no 4" vuodelta 1937 from the Finnish National Archives Service via Wikimedia CommonsAlright, I enjoy a good, 30 year fixed rate mortgage as much as anybody.  But, what if you want to have a shorter mortgage to hit a goal?  Let’s say that you wanted to have your home paid off in 15 years.  Does it make sense to have a 15 year loan?

Here’s my opinion:  If you’re going to get a mortgage, get a 30 year fixed rate mortgage, then pay extra on the payment (toward principal) to shorten the loan to your desired length.  I have one major reason for suggesting this: you can always choose to pay more on your mortgage, but it’s usually impossible to pay less.*  So, if you experience a hiccup in your cash flow, you can choose to dial down overpayments, but you still can meet your obligation.

Here’s what I’m going to do:  I’m going to get myself a good deal on a 30 year mortgage.  It shouldn’t be too hard right now, since mortgage rates are at a tremendous low.  Then I’m going to figure out what I want to do next.  Do I want to hit a target monthly payment or do I want to have my mortgage paid off by a certain time?

If I want to have my mortgage paid off in, say, 15 years then I will need to find out how much extra I’m to send to the bank every month.  How do I do that?  First, I shove my specs for my thirty year mortgage into an amortization worksheet and get the minimum monthly payment.  In this case, I put in a $100,000 note at 4.5% for 30 years, giving me a monthly payment of $506.69.  Then, I plugged in 15 years and got a payment of $764.99.  Here’s a comparison between the principal over time.

$100,000 at 15 and 30 Years AmortizationWow, that’s a huge difference!  So, on the original 30 year loan requires a payment of $506.69, which you can set up so that the bank pulls the payment from you checking account every month.  Then you can add the difference, $258.30 every month by using the pill pay feature of your checking account to push the payment to your mortgage company.  While this will probably not perfectly replicate a 15 year loan, since there may be some irregularity in recalculating the extra principal payment, it will do the job.

You can also use similar calculations for a target monthly payment.  Say you can afford to put $800 per month to a mortgage.  How long until you have it paid off? About 14 years.

Remember that your mortgage payment is the minimum payment required, and most mortgages permit you to pay more.**  So, if you want to customize the payment (to be larger) and term (to be shorter), then go for it.

* Some mortgage contracts allow for flexibility in payments, but the vast majority of mortgages don’t.

** Check you mortgage contract for more details.

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